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Symbiosis: you and your bank

03 November, 2008
You both need each other - but that's not enough, you both need more...
Page 14 
if an alien landed here in a spaceship and tuned into almost any TV or radio programme, he could be forgiven for believing that the earth's financial systems had gone into an absolutely unprecedented meltdown.
Maybe it's because all those bright young media things reporting about the 'crisis' with mounting glee are just too young to have any personal experience of the business cycle's downward side. And they've not been taught enough economic history to know that on a rough average we have similar problems every 8-10 years (granted that this time the scale may be worse than most such events since at least the early 1980s). In other words, the basic rules of the financial and commercial systems haven't come to an end - if anything they apply even more rigorously in these conditions.One of the key places where the 'financial system' meets the 'real' or 'commercial' world is at your local bank. The bank which, in many cases, provides the working capital for your business to continue trading. For the sake of sanity, let's assume that the recent government bail-outs of the High Street banks have been enough to keep them functioning as working commercial enterprises.At periodic intervals every bank looks at its customers' borrowings and decides whether to continue with the lending at its present level, extend it or cut it back.What's different about the present economic climate (as opposed to, say, the last major downturn of the early 1990s) is that as well as looking at the customer's financial situation, today the bank will also be looking at its own. As a result, not only may they be much more ready to say "No" to extending your overdraft, they may actively seek to reduce the amount you can borrow - and do so at quite short notice. Obviously any such decision can have a devastating effect on your business.Okay, so life's difficult, but there's no need to panic just yet. Under the new regime banks are being forced to go back to first principles - to the sort of activities that they were formed to do in the first place. Remember that the basic function of a bank wasn't cash handling, selling car insurance or dabbling in strange 'financial products'.Their basic function was to take deposits from individuals and lend that money as working capital to businesses, making a profit on the difference between the interest that they charge on that lending and the lower interest they pay to their depositor. In order to make real profits, the bank has to lend to sound customers who can repay both the capital and the interest - they need you as much as you need them. Biologists call it symbiosis. But as with any relationship, mutual need may be existing, but on its own isn't usually enough of a basis for long-term success. You both need more - in this case it's common, transparent knowledge of the risks and opportunities involved in the relationship. Showing the bank your current financial position is easy. You simply need up-to-date financial figures - just remember that for the bank that really means your balance sheet, rather than just sales figures or a trading report. And 'up-to-date' doesn't mean your last year-end statements from March 31, '08 - it means management accounts from last month, or at the very least from the end of your last trading quarter. Your balance sheet shows them where you are financially; your trading and profit/loss accounts show them how you got there.Accounts may be essential to keep you in business - but if you want to start a new business or expand an existing one they won't be enough either. You'll have to produce a financial business plan showing how much cash you'll need and how much profit you expect to make over the next couple of years.The essence of what we're saying is that businesses need banks and banks need businesses so that both can continue to function.What's more important than ever is that they have accurate, impartial and timely information on which to base their relationship. If you can't already provide that information from your business, you'd better get it sorted quickly - before your bank next invites you in to discuss your relationship.